I’m the Washington D.C. bureau chief for Forbes and have worked in the bureau for more than two decades. I've spent much of that time reporting about taxes -- tax policy, tax planning, tax shelters and tax evasion. These days, I also edit the personal finance coverage in Forbes magazine and coordinate outside tax, retirement and personal finance contributors to Forbes.com. You can email me at jnovack@forbes.com and follow me on Twitter @janetnovack.

When you use a daily deal coupon from Groupon, LivingSocial or Amazon.com’s AmazonLocal at a neighborhood store or restaurant, what amount should you pay sales tax on? The face value of the coupon? Or the far smaller amount (typically 50% of face value) you paid for your deal when you bought it on the Internet? The answer matters to consumers, local merchants and the daily deal industry. Say you pay $50 for $100 worth of goods. With local sales tax rates now averaging 9.6% nationwide according to Vertex, Inc., imposing the tax on the full $100 would add $9.60—or 19.2%—to the cost of a deal, reducing its appeal.

More than a year ago, I reported that the states, by and large, had yet to consider how to tax the burgeoning deal-of-the-day business. Now the 24 states that are part of the Streamlined Sales Tax Use Agreement are devising a uniform policy—one that the group’s Governing Board could adopt as early as its next meeting in late May. Sherry Hathaway, a senior tax policy analyst for the Tennessee Department of Revenue and head of the working group charged with coming up with that policy, told Forbes today that there is wide agreement among the states that the issue needs to be clarified and she expects a proposal will at least be discussed, if not adopted, in May. She noted that industry representatives are eager for a resolution too and have even expressed concern that without formal policies from the states, businesses could face class action suits from consumers upset about how much sales tax they’re charged. (The raison d’etre of the Streamlined group is to simplify and standardize sales tax rules enough to win business and Congressional support for a law which would force Internet sellers to collect the states’ sales taxes .)

Meanwhile, since last fall, a handful of states have independently put out formal guidance on the daily deal tax issue. In September, New York told merchants they should collect sales tax on the full face value of items purchased with deal of the day vouchers, provided those vouchers are for a specific dollar amount—say $100 worth of food at a restaurant. But if a voucher is for a specific service—say a one hour massage–only the amount the consumer has paid is subject to sales tax, New York decided. (Confused? The state’s full memo is here.) California has gone in a deal-friendlier direction, ruling in September that sales tax should be levied only on what a coupon user has paid, not the list price of the item he’s getting. Neither New York nor California is part of the Streamlined group.

Kentucky and Iowa, both Streamlined members, have independently issued what sound like sensible policies. They say sales tax should be applied to what a consumer paid—if that purchase price is listed on the coupon, as it usually is. Otherwise, the full retail value must be taxed. (Hat tip to Sylvia Dion’s State and Local Tax Buzz blog, which first reported on Kentucky and Iowa here.)

While most Streamlined members haven’t put out formal guidance, 21 have now answered a questionnaire from the working group asking what their current interpretation of the law is. (This is also, presumably, what they tell merchants who ask how much sales tax to charge.) Hathaway provided Forbes a spreadsheet with the answers and it shows a mix of views, with a majority of states saying the tax should be levied on the lower amount the consumer paid, if that lower amount is known to the retailer. (While Hathaway’s working group hasn’t yet made its recommendations, I wouldn’t be surprised if that becomes the policy.)

Fortunately for Groupon and other social deal companies, all 21 tax departments agreed in the survey that sales tax should not be collected when a deal is purchased on the Internet, but instead when a Groupon or other coupon is used by a local merchant. That’s consistent with both the way the deal companies now do business and with the established tax rules for gift cards. Those cards, whether store-specific cards sold by retailers, such as Wal-Mart and Target, or use-anywhere cards issued by American Express, Mastercard or Visa, aren’t taxed when sold. The reason is that sales tax is typically applied to tangible goods and the voucher/gift cards are redeemable for—but not in themselves—tangible goods. (The states demand that Hotels.com and Expedia collect sales tax at the time you book a room, Hathaway explained, because they regard those sites as re-selling the rooms after buying them at a wholesale discount from the hotel operator.)

Wait a minute. Why shouldn’t the sales tax be applied to the even smaller amount (as little as 50% of what a consumer pays) that the local merchant receives? Hathaway said the states believe the local merchant is the one making the sale and the amount that Groupon or LivingSocial keeps is an advertising expense for the local merchant. While such business expenses are deductible when determining a retailer’s net income, they’re not deductible when it comes to the sales tax, which is levied on a retailer’s gross receipts. The one partial exception to this interpretation is Texas, which said in the survey that it expected merchants to collect sales tax on the amount they recorded in their books as receiving from a sale. Thus if the merchant only recorded the sale as yielding say $25 (the amount it got from Groupon) it would only have to collect sales tax on that amount.

Unfortunately, even if the Streamlined group’s Governing Board does adopt a reasonable policy of taxing what the consumer paid, it will be of no immediate help to New York deal addicts, since the Empire State isn’t a member of the group. Indeed, New York City restaurant diners have recently griped (in Yelp reviews such as those here and here and in emails to me) about feeling ripped off after using a Groupon and then being expected to pay both tip and the city’s 8.875% sales tax on the full retail price of a mediocre meal.

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Great article Janet, thanks for the update. I am an attorney in South Florida that focuses primarily on Florida state and local tax issues. Although Florida has not “officially” taken a position, I have heard on audit and through a few publications/interviews that Florida views that the amount subject to sales tax is the full face value of the Groupon. http://www.floridasalestax.com/Florida-Tax-Law-Blog/2012/January/GROUPON-ONLINE-VOUCHERS-BIG-SALES-TAX-ESCHEAT-RI.aspx

Great article. I have been looking for an article like this for a while. I am coming from the running of a daily deal site side. The one part of daily deals that you did not address is the trend of offering product through daily deal sites. Drop shipped or for in store pickup. Being that it is not a gift certificate exactly is the site now responsible for the tax or the merchant/manufacturer? We are partnered with merchants to offer product and then the merchant ships direct from their warehouse. What if we have the product shipped to our office and we do the shipping, are we now considered a retailer and have to pay the tax? This is just another tax issue that arises through daily deals sites.

Hi Janet, First a sincere thank you for the “hat tip” and blog mention. Like you, I’ve been following developments in the “Groupon-sales tax” arena quite closely and reporting on the impact of the guidance issued by states that have done so. In your article you address New York’s and California’s treatment of Groupon discounts and refer folks to my blog for an update on Kentucky and Iowa. (Thanks again!) You also addressed Massachusetts’ draft guidance in your prior post “New York Makes Grab For Groupon, LivingSocial Sales Tax”.

I also wanted to quickly point out that in January, Maine Revenue Services (not a SST member) issued guidance in a taxpayer bulletin (Instructional Bulletin 39: Sale Price Upon Which Tax Is Based) in which Maine essentially confirmed that sales tax is due on the amount the subscriber paid for the “deal”. (Maine will treat the “discount” as a “cash discount allowed and taken”.) There are also indications that Illinois (also not a SST member) may be moving towards issuing their own directive or tax bulletin with guidance that may be similar to Kentucky’s and Iowa’s. In early February the Illinois Department of Revenue (IDOR) gave a response to a question (on how Groupons impact sales price) submitted as part of its Annual Tax Practitioner meeting. The IDOR’s response was that if the retailer knows the amount paid for the voucher, then sales tax will be due on this amount (the discounted voucher price). But if the retailer does not know how much the customer paid for the voucher, sales tax is due on the full value of what is received. In late February, the IDOR also issued a Private Letter Ruling. I won’t go in the specifics of that ruling but will say that the IDOR’s response was the same.

What’s interesting is that some states are acknowledging that Groupon discounts should be treated similarly to “retailer’s discounts” and should reduce sales price in the same way (California, Maine). But other states, such as Massachusetts are taking a very literal approach – stating that Groupon discounts are neither a manufacturer’s or a retailer’s discount – they are an “other discount” – and so they are not allowed to reduce sales price in any situation. (As you know, Massachusetts issued a draft directive way back in September – Working Draft Directive 11-XX. Although it’s now been more than six months since the draft was issued, Massachusetts has yet to issue its final directive!)

Also, I recently wrote an article published by Bloomberg BNA, “State Tax Issues to Consider With ‘Groupons’ And Other Third-Party ‘Deal-of-the-Day’ Programs”, (subscription required) in which I covered the guidance issued by every state that has done so, but also brought up other state tax issues such as whether expired “deal-of-the-day” instruments are unclaimed property for state escheat purposes. These vouchers/certificates typically have a short expiration date and many customers may simply assume they are not usable once the expiration date has passed (although state law may require that the merchant still honor the voucher). Because a significant percentage of unclaimed property held by a state is never claimed by is legal owner, the state eventually reaps a good amount of revenue from these unclaimed items. I also wonder whether it’s simply a matter of time before the states take the position that Groupon, LivingSocial and other “deal-of-the-day” marketers have an “economic nexus” to their states. This would allow states to impose their corporate income, franchise or other business taxes on these third party deal-of-the-day marketers even if they have no physical operations or employees in the state.

Anyway, so many state tax issues associated with Groupons. Great article and I look forward to your future updates.

I’ve noticed that Groupon and LivingSocial have started to make clear that while the promotional value on the coupon expires on a certain short expiration date, but that the coupon is still good for the purchase price after that. I believe this is a response to the rules governing gift cards in various states.

Very vital topic, but to date, under-analyzed. Most of the analysis and comments are concerned with (1) how “should” the sales tax be calculated when a social-media deal coupon is redeemed, or (2) whether individual consumers are getting fleeced by merchants applying the wrong tax rule. If Groupon revenues produce $140MM in sales taxes a year and Groupon has half the market (I’m speculating on this point), hundreds of millions of sales tax dollars are at stake. What’s not yet surfaced in the discussion is what portion of those taxes are actually reaching the tax man.

Consensus seems to be emerging among taxing authorities that sales tax applies to what the consumer paid (or alternatively, consumer payment + Groupon payment to merchant). Similar consensus from the consumer side is that merchants are over-charging tax.

But — are tax investigators questioning merchants on how much of the sales tax is being remitted? Shouldn’t audits be demonstrating the amount of tax collected by merchants on coupon redemptions? Isn’t the next step to match up the tax collected with the tax remitted? My strong suspicion, based on a personal experience with a New York salon, is that many merchants are clawing back discounts by collecting AND RETAINING excess sales tax. Notwithstanding the NY finance department’s recent advice (salon services collect tax on only the amount of the voucher), an East Side salon last week conditioned a hair appointment on the payment IN CASH of a $59 sales tax on a $69 voucher. The merchant’s theory was the service was “worth” $575 at retail (8 times the voucher amount). It’s hard to believe the salon is going to forward the $59 cash to the government…

New York tax examiners ought to be out in force making sure that money collected from the public under the guise of sales tax is actually finding its way to the tax coffers. They could start by demanding Groupon and its competitors identify the largest merchant participants in a variety of categories, and take a stab at matching up taxes assessed, collected and remitted by these merchants. They could also use “testers,” to determine what merchants are doing about sales taxes on vouchers.

The sales-tax-on-voucher issue isn’t just about public grumbling about overtaxing, or who bears the responsibility for making sure businesses get the tax law right. While these debates continue, cities and states are likely missing millions in tax remittances, while merchants hide behind a curtain of uncertainty about the rules to pocket dollars claimed to be bound for the tax collector.

I’m curious on the source of your information for Texas. I’ve heard differently from the comptroller’s help line. Would it apply similarly for an internet ticketing service (Eventbrite, Ticketmaster, etc.) if only the net amount was given to the business?